Answers to Questions About Auditors Liability and Independence

QUESTION 1a)

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King & Queen are liable to Easy Finance limited because, by the virtue of being an audit firm bound by word audit, it was supposed to be an independent firm, which examines books of accounts with a view of proving An unbiased and fair perception of the company's financial position. According to the information provided by the audit firm the report did not provide a true and fair audit even after auditing the firm for several times. The audit firm is also liable since even after auditing Impulse Pty Ltd it was not in a position to detect frauds and also it provided an unqualified report. This was clear on the 30th June 2012 upon auditing of the firm, King & Queen audit firm provided an unqualified positive report yet in the real sense the company was suffering liquidity problems with a drop in both debtor's turnover and inventory turnover. The directors of Impulse Pty Ltd were also liable in respect to the accusations against them since they gave room to the company to acquire unlawful financial boost by preferring their personal interests over the interests of the company they were working for. King & Queen audit firm should have considered Audit quality in their auditing process. This is usually incorporated in the working papers. A better analysis of the Impulse Pty Ltd Company's assets and business would have shown that it was not in a position to acquire the advance loan.

King & Queen audit firm were liable because, by the analogy of negligence of valuation cases, the auditors were supposed to be charged for the overall loss made by the company. The auditor who is king and Queen Firm, was in breach of duty in that it failed to check into the affairs of the company like a competent auditor would do. If they were competent the certificate to authorize the release of the loan would not have been signed and the subsequent award of the loan by Easy finance limited would be barred. Entirely the audit firm is liable to Impulse Pty Ltd because it provided an unqualified report when; proper books of account are kept, the auditor has received all the information and explanations, when financial statements are in agreement with underlying books and when profit and loss portray a true and fair view. King and queen audit firm provided a positive opinion yet Impulse Pty Ltd had been facing some problems. Being an audit firm, it was supposed to purpose on providing a true and fair view of the company's financial stand, ascertain if books of accounts were kept correct and as per its statutory objective. This resulted to Impulse Pty Ltd suffer losses since it acted as a third party. King & Queen audit firm is liable for acting in negligence. This is because the information it provided was unqualified and led to the acquisition of a loan from Easy finance limited.

Question 1b)

My answer would not change even if EFL had written to the audit firm requesting them for advice since they intended to acquire a loan using the 2012 audited financial report since King and Queen Audit firm had already provided a report which was unqualified. This could be provided if the financial statements were perceived to be free from any misstatements. In the cases where the auditor has carried out a fieldwork to test the effectiveness of an audit, the audit cannot be termed as unqualified. Even upon writing by Easy finance limited to king and queen audit firm, asking for and advice on whether to advance loan to Impulse or not, this could not change anything. This is because the audit firm had already provided a report that was unqualified and Impulse's financial statements were free from any material misstatements. According to the audit firm the performance was valid, accurate and complete of which it was not the case since it was facing financial liquidation.

Question 2a)

Actual independence refers to the independence of facts. Its mainly looks at the state of mind of an auditor and how an auditor deals with the given situations (Swanger and Susan, 1998). . That is, the auditor is capable of making an independent decisions notwithstanding the compromising state by the company directors. Actual independence is important for any auditor since he acts as the agent of shareholders and therefore, his or her decision should not be influenced by any party. Actual independence also enables the auditor to express a balanced opinion and lastly auditing being an independent examination, the auditor should act independently. On the other hand, perceived independence refers to independence basically in appearance. This is what the third parties would understand as being independent so that one is perceived by others as being independent. Thus, if you audit your brother's company, in which your brother is the CEO, you will be perceived not to be independent. This reduces the chances of an auditor acting in contrary which adds credibility to the report. Perceived independence is important because it increases the credibility of an audit work, increases confidentiality of third parties upon using a company's financial statements to make judgmental decisions of a firm (McEldowney and John, 1986)

Question 2b)

Bob who is an audit assistant is not fully qualified to be an auditor because he is still studying. Information of Club casino should not have been disclosed to the third parties. In this case, there is a breach of professional ethic of confidentiality. Therefore, an auditor should not rely on such information since it may mislead him or her in reaching to the true and fair opinion.

Wendy did not have the requirement of being a secretary. But due to familiarity with the Ace Limited's working environment, the secretarial post was granted to her. There is a breach of professional ethic of independence which is affected by familiarity. In this case, there was a personal relationship in the appointment of a secretary since she had worked in that company for long. An auditor should not rely on any information provided by Wendy because it was an obligation out of engagement letter on her scope of work.

Leo is just an elder son to the factory's foreman and therefore not qualified by profession to test the internal control systems of Precision machinery Limited. There is a breach of professional ethic of independence in this case since he got the job out of a family relationship. The auditor should on rely on any information provided by Leo since it lacks he may not be at the position to get accurate auditing information from Leo.

Chan & Associates auditors breached professional ethic of fees and remuneration by accepting to be given new office furniture as a means of payment which they had not agreed on earlier. Also, they breached independence as an ethic by accepting gifts .The auditor should resign for the appointment of another auditor since he is likely to give an unqualified report where it's not supposed. By the virtue of becoming a shareholder in the company Chan & Associates should stop practicing any auditing work on Classic Reproductions since it will be like undertaking an audit on itself.

References

McEldowney, John E. An Empircal Investigation into the Perceived Independence of Auditors. 1986.

Swanger, Susan L. The Effect of Internal Audit Outsourcing on Financial Analysts' Perceptions of External Auditor Independence, Financial Statement Reliability and Investment Desirability. 1998.